Domestic Equity Funds -- February 2005 Review

March 3, 2005 — February went out like a lion for the Northeast and financial markets alike. After a weak start in January, domestic stock funds rebounded to the upside in February, rising 2.0% on average. The advance was led blue chips, which showed robust gains amidst solid economic growth and strong earnings.

“February’s performance was helped in part by a fairly successful conclusion to the elections in Iraq followed by some bargain-hunting by traders who felt that markets were oversold in January,” explains Sam Stovall, chief investment strategist at Standard & Poor’s. “In addition, markets were bolstered in February by reports that the economy was not overheating, and that inflation was not likely to be accelerating.”

The blue-chip NYSE Composite Index and the Dow Jones climbed 3.3% and 2.6%, respectively, for the month, while the S&P 500 Index gained 2.1%. The tech-heavy Nasdaq Index, however, lost another 0.5%, despite a recent surge in semiconductors. According to Standard & Poor’s Investment Policy Committee, investors continue to avoid large-cap technology stocks.

Mark Arbeter, Standard & Poor’s chief technical analyst, pointed out that the S&P 500 and DJIA indices benefitted particularly from outperformance in the energy sector, which was buoyed by continued high crude oil prices, as well as from strength in more defensive and cyclical areas like materials, industrials and utilities.

Generally speaking, “growth” didn’t keep pace with “value” in February. Value-oriented portfolios rose 2.8%, followed by blend portfolios with a 2.2% gain, and growth portfolios, which edged up 1.6%. Overall, mid-cap value represented the best-performing fund category for the month, rising 3.2%.

“Small- and mid-cap equity funds are continuing to show strength,” says Phil Edwards, managing director of fund research at Standard & Poor’s. “The question is, how long will this last considering that U.S. markets are in the third year of a recovery?”